important administrative considerations

| June 14, 2016

Question
DQ 1 What are the important administrative considerations in the capital budgeting process?

DQ 2 Why does capital budgeting rely on the analysis of cash flows rather than net income?

DQ 3 What are the weaknesses of the Payback Method?

DQ 4 What is normally used as the discount rate in the Net Present Value method?

Problems
5
Assume a $50,000 investment with the following two cash flow alternatives.

OPTION A OPTION B
Year 1 $10,000 $20,000
Year 2 $11,000 $25,000
Year 3 $13,000 $15,000
Year 4 $16,000 0
Year 5 $30,000 0

Which alternative would you select under the Payback Method?

6
In problem 5, if the cash flow for year 5 of Option A was $30,000,000 instead of $30,000, would
your answer change under the Payback Method?

11
Home Security Systems is analyzing the purchase of a $40,000 piece of equipment. The cash
flows generated will be:

Year 1 $15,000
Year 2 $20,000
Year 3 $25,000
Year 4 $10,000
Year 5 $5,000

What is the procject’s Internal Rate of Return (approximate)?

If the Cost of Capital is 12%, should the project be accepted?

13
Hamilton COntrol Systems will invest $90,000 into a project that will generate the following
cash flows:

Year 1 $23,000
Year 2 $38,000
Year 3 $60,000

At the end of three years, the company will incur a $15,000 cost to shut the project down.

If the Cost of Capital is 10%, should the project be undertaken? (use the Net present Value
method)

15
Hudson Corporation is considering investing $14,400 into a project that will generate the
following cash flows:

Year 1 $7,000
Year 2 $7,000
Year 3 $4,000

Assuming a cost of capital of 11%, what is the project’s Net Present Value?

What is the project’s Internal rate of Return?

Should you undertake the project?

Order your essay today and save 30% with the discount code: ESSAYHELP
Order your essay today and save 30% with the discount code: ESSAYHELPOrder Now